Can A Debtor In An Active Chapter 13 Qualify For a Home Loan?
Yes, it is quite possible for a debtor in an active Chapter 13 case to obtain a home loan. Here is a link to an article that discusses how and when a debtor might qualify for a home loan following a Chapter 13 (and Chapter 7 bankruptcy). Typically, a debtor in Chapter 13 must obtain bankruptcy court approval prior to obtaining a home loan. The reason for this is that a debtor has committed to a Chapter 13 Plan that provides for payment of certain debts in certain amounts. Incurring a mortgage (or any larger debt) must be reviewed by the court to make sure that the new mortgage debt will not adversely impact the current plan. If a new home loan would not adversely impact a Chapter 13 case (e.g. not cause a debtor a financial hardship and inability to make the full plan payment), the the court will, generally, approve the new loan.
How Can A Debtor Obtain Bankruptcy Court Loan Approval?
In order to approve a request to incur a debt, the court must be provided all the relevant information for the proposed loan. Debtor’s counsel will typically need answers to the following questions:
- What is the purchase price of the home?
- How much is the requested loan?
- How much down payment is required, if any?
- What is the source of the down payment, if any?
- What is the projected monthly “PITI” mortgage payment (include taxes and insurance)?
- What is the loan interest rate? Fixed or adjustable?
- What is the term of the mortgage? 30 years?
- Do you have an estimated HUD -1 Settlement Statement showing the terms? (We need it.)
Once this information is available, a Debtor will sign a declaration that sets out the request. The Motion and declaration will then be mailed to creditors and filed with the court for hearing. Typically, the hearing will occur no sooner than about 30 days from the date of the filing of the motion. BUT, the time period and time it may take to obtain a court order approving the loan varies, i.e., it could take longere than 30 days. Transaction closing should be set out far enough to allow the court time to have all the information it needs provided.
What If The New Loan Would Impact The Plan?
If approving the loan would negatively impact the plan, then that impact will have to be dealt with before the loan can be approved. This normally means that a debtor would have to file a motion to modify the existing plan to make the controlling/current plan consistent with the facts of the new loan.
EXAMPLE: If the mortgage payment would be higher than your current rent expense AND the projected housing expense increase would mean you have less to pay to creditors, then that impact would have to be approved by the court. A debtor would have to file a motion to modify the plan (in addition to the motion to approve the loan) to reduce the dividend/payments to creditors. There is no guarantee that the new loan would be approved if it means less for creditors. However, if you are adding a member to your family and you reasonably need a larger place, then the new loan might be approved.
Contact Your Attorney Early In The Process
If you have been qualified for a home loan and want to buy a home, you almost certainly need court approval to incur the debt. The prospective lender will also need to see the court order that authorizes you to incur the debt. It takes anywhere from 30-60 days, in most cases, to obtain approval to incur mortgage debt. Therefore, do not delay in making contact with your attorney to make sure you have everything in place to better increase your chances for a smooth transaction.